2022 State of The Industry with Dr. Peter Linneman (Part 1)

Dr. Peter Linneman joins Trademark’s Terry Montesi for his third appearance on the show to discuss what 2021 taught us about the economy, and his current thoughts on supply chain issues, capital markets, and labor shortages in 2022. They also ponder the big risks on the horizon for retail, mixed-use, multifamily and office real estate, as well as their predictions for this year.

Leaning In is published every second and fourth Wednesday of the month. Be sure to follow the show on your preferred podcast app to hear Part 2 of Terry and Peter’s discussion on single-family housing, the future of mixed-use spaces and Peter’s opinions on real estate as an institutional investment vehicle.



Terry Montesi: Today, I’m joined once again by my friend and Principal of Linneman Associates, Dr. Peter Linneman. Today, we’ll take a closer look at his 2022 predictions. We’ll talk about the US economy, where we are in the cycle, and also how labor shortages, supply chain issues, and the pandemic will influence the real estate market.

Peter, thanks for joining us today. My first question for you is what did we learn and what did you guys learn in 2021 about our economy and about the multifamily, retail, and office sectors, the real estate business X industrial?

Peter Linneman: Well, I thought about that question, as you might imagine, on New Year’s Day. What I think we most learned is the power of this economy. And when I say this economy, I mean the US. You, me, all of the people listening, all the people we pass on the street, we really learned the power of the economy. Think about it. We shut literally – not figuratively – we literally shut down almost 40% of the economy for three and a half months. And on top of that, we had a virus we didn’t know anything about to speak of. And on top of that, we had an election year with bizarre turmoil. And on top of that and on top of that, and on top of that; you get the point. And yet, through 2021, real GDP a percent or two above where it was in 2019, most of us are wealthier, most of us have more savings, almost anybody who wants to have a job has a job. As you know, we’re at record high job openings. So yes, employment is not fully back, employment always lags. We’re adding a lot of jobs, and it’s not generally for lack of jobs. And you go, oh my God. And Christmas sales, retail, were terrific. If I go to your apartments, your NOIs adjusted for inflation have never been higher. Your occupancies are strong. Capital markets are flowing pretty well. There’s a little jam up for office buildings, for retail, not for strong retail, strong retail is wide open, but weak retail. And by the way, we came up with not one but two or three actually vaccines that worked, and we got it distributed. And the only people that aren’t vaccinated at this point don’t want it. So, it’s not for lack of productivity and such. My God. Do you understand what that says about the power of this economy? In spite of, in spite of, in spite of. Are we behind where we should be if none of this had happened? Yeah. If none of this had happened, GDP would be 4% higher adjusted for inflation. If none of this had happened, employment would probably be 8 million higher. But my goodness. So that’s what I really learned. And I always knew it, but when you hear this phrase, and about every five years, I put it in Linneman Letter, don’t bet against the US economy. This is why. This is the demonstration of don’t bet against the US economy.

Montesi: Got it. I have read that over the years many times, and this is the best example of my lifetime certainly that I remember. Well, what about your thoughts on the economy as it relates to labor shortages, supply chain issues, other COVID instigated issues that we’re dealing with?

Linneman: Okay, let’s take the labor issue, which is an important one. We are still about, I think, 3.5 to 4 million jobs short of where we were in the end of 2019, but we’re recovering. And as I said, we would have grown jobs over that time period. Anybody, basically, who wants a job can get one. So, we don’t have to worry about are there jobs? What we have to worry more about is why aren’t people taking them? And wages are up. I’m sure it’s not because wages haven’t risen considerably. So, you say, well, what’s going on? I think there’s kind of three things that are going on. One, there is a childcare-ish issue still around, though, it’s not as big as a year ago as schools are back in. But not all- what I read today, 3,700 school systems in the country or some number, I don’t know, however many there are, it’s a factual question of how many schools are not in session. So there still is a childcare issue a bit floating around. Secondly, I’m almost 71, anybody who was 64, 63 and older who lost their job, they’re not coming back by and large. So, if they lost their job in 2020 or early ’21, they’re not coming back. What they did was take 18 months of unemployment that played pretty well as their severance, and they’re not coming back. They probably left the labor force anywhere from one year to four years earlier than they otherwise would have. So, if you go to – how shall I describe them? – mature, because I’m not old, mature, medium and lower skilled workers, there is a shortage. And it’s because the boomers that lost their jobs that fit that description, they just aren’t coming back. But it’s not as bad as it sounds because they were going to retire in a couple of years anyway. So, it’s a time shift that there is a labor shortage in the meantime. It will take probably a good year, year and a half to work out fully for that point. And that’s because that’s how much earlier those people retired. The rest of the labor market is coming back to the reality of, gee, I actually have to work if I want to get paid. And as you know, from March to early September, if you were on unemployment, it paid a lot of people better not to work then work. And just like you take depreciation on your building, and you did not have local property taxes on your federal because that’s what the government says they want you to do by policy, in the same way, these people were told the government wants to pay you more not to work and to stay on unemployment than to get off. So, what did those people say? Fine, if that’s what you want me to do, that’s what I’ll do. And so that kept people out of the labor market, especially at the lower skill, maybe the bottom 40% of the wage distribution. Wages have come up. People are being called back in. It’s not permanent, but it will take time. Think about what we talked about, Terry, when we started. You can’t shut the largest economy in the world, plus a lot of others, down for four months without expecting a lot of knock-on effects. So, one of them is the labor market. The other is what’s loosely called supply chain. And some of it truly is supply chain, like the ships are out at sea, and there’s a lot of reasons why the ships are out at sea. Some of it is capacity was reduced. That’s not technically a supply chain issue. A lot of it was in March, April, May, June, July of 2020 capacity got slashed. Companies did go out of business, maybe not in the United States so much because they got PPP, but the whole world didn’t get PPP. A lot of places went out of business.

Montesi: And their labor force was thinned or sick, etc.

Linneman: Well, and one of the things I point out to people is – this is an intellectual discussion, it’s not an actual – suppose the capacity of doorknobs for homes went down by 2%, not a big drop in capacity. You shut the economy down and you only got a 2% reduction in doorbell capacity because a couple of firms went out of business, or they shut down a line or a foreign firm. You go well, that’s not much. Well, remember GDP is back, home production is back. So, demand is where it was and capacity would be 2% less. But you say how could that cause a big price increase? Think of the following. Let’s think of a $300,000 home. So, you do a carry cost of, what, 10% a year on that. So that’s 30,000 a year carry cost. Let’s just be quick, call it 2,500 a month. 2,500 a month, $600 a week carry cost. A hundred dollars a day carry cost for the home builder. The doorknob normally costs $60. How much would you pay to get the doorknob because you can’t sell the house until you have a doorknob? Well, you’d go to a hundred like that. All the people producing homes that need a doorknob to stop the hundred dollars a day carry cost say, well, I’ll go to a hundred. And somebody says, well, I’ll go to 200 because that’s just two days carry. And what happens to the price? Even though it is only a small supply reduction, it’s a huge price spike. Now, will that last forever? No, because those high prices are signaling bring capacity back, bringing capacity back. And in fact, the biggest danger in the US economy I see for this year, for 2022, is if we were to get wage and price controls. And there is always a bit of risk that you see in the papers and the politicians saying suddenly companies got greedy. They didn’t suddenly get greedy, capacity got shrunk and logistics got tied up. And I only take the doorknob example to show how something trivial could have a huge price increase. That’s all my point is. And it reminds me, I think it’s in this most recent Linneman Letter. Ben Franklin lives about four blocks from where I do, and I’m a big Ben Franklin fan. And he wrote about from one of the nail. For one of the nail, the shoe was lost. For one of the shoes, the rider was lost. For one of the rider, the message was lost. For one of the message, the battle was lost. For one of the battle, the empire was lost, all for one of a nail. That’s a little bit what’s going on. It’s not that everything is so big. It’s just you’ve got all these log jams happening. And until capacity fully comes back and until logistics fully work out, it’s going to take a while. Now, let me give the good news, and then I’ll shut up. The good news is if you look at freight shipping costs, they skyrocketed, you know that. They skyrocketed in the ladder third of last year. It’s fallen by 25% in the last probably about seven weeks. Now it’s still way high. It’s still way, way high, but it’s fallen by 25%. Why has it fallen by 25%? Capacity is slowly coming back. Lumber for your apartment construction, same thing. Lumber skyrocketed from, what, about 330 if you go back two years ago to I think it got up to some crazy number like 1800. And it’s come down to like 5 or 600, still high. Why has it come down? Capacity has slowly come back. It’s got more to come. That’s what you’re going to see a lot the next year and a half. And by the way, labor’s the same story, it’s just a different version. But the price control risk is a real one; that would really hurt the economy. I’m old enough, I lived in the 1970s when the Nixon and Ford administrations had wage and price controls, and it’s a disaster, just a disaster for the economy. And it’s a political answer. It’s rent-controlls. It’s a political answer not an economic answer and it does huge economic damage. So, if I were to say one thing listeners should be wary of, it is if this momentum behind its evil business, trying to gouge. By the way, if business is evil, it’s always evil. If it’s trying to gouge, it’s always trying to gouge. It’s not like it suddenly said, oh, Terry, let’s start gouging today. It’s not that. It’s that there is a shortfall of capacity and some technical log jams around ports and so forth created by a lot of lockdowns.

Montesi: Got it. Your subconscious must have remembered the next question because it’s one of the biggest risks you see on the horizon for the retail, multifamily, office, mixed-use real estate business. And so other than price or wage controls, what are the other things that you’d be watching for on the horizon?

Linneman: The other is, I don’t think it’s a big risk, they are going to raise interest rates. The fed has been a terrible predictor of themselves always. So, when people say, “The fed says,” the fed is the worst predictor of themselves that I know of. Like everybody is a better predictor of interest rates than the fed. However, let’s play out a scenario, Terry, and let’s say in 2020, the fed raises the short-term interest rates four times; let’s say each quarter, they raise it by 25 basis points. The short-term rate would be all the way up to like 1.1%. You think you could live with that interest rate on the short end? You’d live all the rest of your life basically. Now, who would be hurt by that? The people who could get hurt by that are really heavily leveraged, really heavily leveraged like overnight borrowers, one-week borrowers. So, they’re heavily leveraged; they’re not real estate people. If you have a floater and you can’t live with a hundred basis points increase in your short-term interest rate, you shouldn’t have done the project, right? You shouldn’t have done it. So, it’s not real estate people. It’s more the financial, highly leveraged kind of players. And you could imagine there are people out there who’ve leveraged themselves to the hill on financial instruments where a hundred basis points could kill. Now the fact that it’s not going to be a hundred overnight but probably a quarter and a quarter and a quarter and a quarter means I don’t think they get killed, but there would be some risk of what financial people that you and I have never heard of who live like that, then they can’t pay their debts. Now there’s so much excess reserves in the system that if they couldn’t honor their debt, it wouldn’t endanger the banking system. Because there’s literally endless excess reserve. So, I don’t think it’s a big risk, and it’s not even the risk as people think about it on the short-term interest rate. The other would be what about the long-term interest rate? And you say, well, what if the long-term interest rate goes up when they stop buying bonds, when QE stops? Well, I think what will happen is the same thing that happened last time, which is the long-term rate will go up when the fed stops buying. You drop out a big buyer of an asset that’s been a dominant buyer-

Montesi: Price goes down.

Linneman: Price goes down, yield will go up. I don’t think it goes up much. Why do I think that? The same thing happened with the taper the last time. It went up a bit, fifty, a hundred basis points, but not a lot because there’s so much money in the system. So suddenly, people would say, well, gee, at that interest rate, maybe I’ll buy. There’s so much money. So, I don’t think it goes up more than fifty to a hundred basis points. Now let’s go to that. So, the interest rate goes from, I think it’s like 1.6% today on the ten year, and it goes all the way to 2.6. Now, as a borrower, are you happy about that? No. Does it destroy your business? No. And if it does, you deserve to be destroyed. I’m not being cavalier. You get my point, right? And so, I don’t see that as a big risk, but it is an issue. By the way, I believe they should raise rates. I think it would be better for the economy because it will start making clear to Congress and the White House that money has a cost to them. What we’ve done for the last pretty much decade is tell the government that if you spend and you finance short term, there’s no cost to it.

Montesi: It doesn’t really cost much.

Linneman: Well, if I told you it doesn’t cost you anything for your money, you’re going to do some less intelligent things, not to say you’re stupid. I’m not even saying Washington is stupid. It’s tempting, but I’m not going to say it.

Montesi: May not be quite as cautious.

Linneman: It’s not this administration, it’s not this Congress, it is all. But if you give the government money that basically is costless, they’re not going to be prudent as much as they should be. And private borrowers are the same way, are not going to be as prudent. So, I actually think they should raise rates, and I don’t think it will derail the economy, but that’s something to worry about. And then the obvious unknowable is what if we are yet to get a much deadlier variant than we’ve ever seen that is also highly contagious? Now I’m not an epidemiologist. I read a lot. I talk a lot. I have a coauthor at Cleveland Clinic I speak with. I don’t think that’s likely to happen, but if it did, it will slow the economy down. Otherwise, I think slowly we will live with it. Cautiously, carefully, we’ll figure out how to live with it and continue to move on.

Montesi: And you didn’t say inflation.

Linneman: I don’t think inflation because it’s real. It’s not like it’s a fantasy. Now, it is real. By the way, early in the year, let’s say the first half of last year, it was largely fictional. Mainly, think of hotels, let’s just take hotels as the best example or car rentals. So, if you did year over year inflation in April of ’21 or May of ’21, you got staggering inflation because hotel rooms were zero price, car rentals in 2020 were zero. So that was fictional. It was real, but it wasn’t real. We are with the issues we talked about, the shortages though, those are real. Why do I not worry about them? I think they’re just part of the price we pay to move forward. We’ve already paid. Think of it this way. We already paid the real price: We shut down. Now we’re on the upswing, and these prices are saying where should the capital go? Where should the capacity go? And in that sense, they are good. Now they do cause a problem for you, for me. I called my people just recently because our rhythm, Terry, is that we sort of give our raises and bonuses in September. We are on a tax year that’s annual, but just because of when we started the company, we started the company in September and then you just kind of redid. Okay, so you can imagine we looked at somebody and said we’re going to give you 1%, 2% more than inflation. We’re nice guys, we’re good, we like you. Well, suddenly- and we thought inflation was 3%, 2%, so we gave them let’s just say 4%, and we thought aren’t we good people for giving them 4%? Well, we may not be so good. We may have actually given them a 3% cut or 2% cut or no increase. So, what you and I and a lot of employers are going to have to do is revisit that. And we don’t know the answer. We don’t know how much inflation there’s going to be this year. So, I’ll tell you what I did. Now, I don’t have a million employees; I have a small team. I basically said to them, look, I’m not going to screw you. I’m going to find out what inflation is, and I’ll true you up, and I’ll raise you up. Let’s just bear with me. We figure out what it is, be patient, you’ve known me a long time. And it’s easy with a small team. It’s harder with a big team. But that’s what you’ve got to do. That’s the danger of inflation, that we make unintentionally bad decisions. You thought you were giving them a 2% raise and you gave them a 4% reduction. That’s a bad decision because if you’d have given that person a 4% reduction, that’s not what you wanted to do. So, there is this, the danger of inflation at this point is the fallout of unintentionally bad decisions. They weren’t bad decisions, but unintentionally bad-

Montesi: Unintended consequences to the uncertainty.

Linneman: Unintended consequences. And that is you underpriced your product, you underpaid your labor, and all those distortions that come with that,  people quitting. Unintentionally, you got somebody to quit. You were trying to get rid of them. What inflation is really going to do this year, I think it goes down as the year goes on. It’s going to still be high and it’s going to go down as the year goes on because I think capacity comes on absent price controls.

Montesi: That’s my thoughts as well.

Linneman: But you do have to manage it because if you unintentionally pissed off – that’s a technical economic term – a thirty year employee-

Montesi: Do they teach that at Wharton?

Linneman: Yeah, that’s from Wharton.

Montesi: Yeah, I didn’t go to Wharton.

Linneman: Yeah, if you have done, you’d have found that out. But if you made your employees unintentionally mad and they leave you, you’ve got to manage through all of that lost productivity. That’s the real date danger I think of the inflation we are seeing.

Montesi: Got it. So, regarding real estate as we start 2022, what do you see as the biggest trends affecting real estate?

Linneman: Capital, capital, capital. What was the old phrase? Water, water everywhere. But no, this is going to be capital, capital, capital. If you think there was a lot of capital available in 2021, I don’t think you’ve seen anything yet. We talked about this last year. But I think that the fed has put so much money in the system, most of which has not come out, that when it does come out, you are just going to see asset price inflation because the money has got to find a home. And those people that got the money were banks and banks lend disproportionally to asset buyers. And we saw it happen after QE 1, 2, 3, it took a little time. And I think by the end of this year, you’re just going to see a lot of liquidity, absent something very unexpected happening, and it has to find a home. And that means for us lower cap rates. And people say, well, how can they go lower? And you go, it is not hard; an unprecedented amount of money creates unprecedented pricing. It’s that simple. And I don’t think they go 50% lower, but I don’t have any trouble seeing them still go another 10% lower. So, you thought a 4 cap was low, it could easily go to 3.6 as the weight of money, just the weight of money, not growth, by the way. I’m talking independent of income growth driving that. I’m just talking given the growth that’s out there, I’ve just got to find a home for my money. And if you think about it, real estate and other real assets, like the stock market, offer what I call a fighting chance. What do I mean by that? Well, if I go buy a bond, let’s go back to our government bond, the government bond, the long bonds like 1.7. We know inflation was 2%, it’s up to 4.5 to 5%. I haven’t even got a fighting chance. There’s no fighting chance to get a positive real return. None, zero, no real chance for fighting return. Okay. Now let’s go, and I was buying an asset at a 4 cap, just to do it. And now it goes to a 3.6 cap, and you go, well, I actually, as a buyer, preferred the 4 cap, that was nicer. But still with a 3.6 cap and even at a 2.6 interest rate, I can still borrow at probably, what, 3.6. So, I can still cash flow, may not be big positive leverage, and you go I at least have a fighting chance. I at least have a fighting chance. And so, these real assets, as opposed to nominal assets, at least have a fighting chance. And therefore, when the money comes out looking for a home, wouldn’t you rather go into an asset where I may not get a great return, but at least I have a fighting chance.

Montesi: Yeah. And you’ll capture some of the economic growth that drives rent growth in the future.

Linneman: And you’ll capture the money flow that will drive asset prices more so.

Montesi: So, any trends that you see affecting the consumer and retail real estate in ’22?

Linneman: I think they’re going to get more normalized, more normalized. They’re still – how should I say? – a bit whipsawed. Although we did see a reasonably normal holiday retail. But still on vacations, for example, we’re still seeing not fully normalized on holidays. We’re seeing much more normal, put aside the immediacy of Omicron. But we’ve seen much more normalization. And I think this will be a year of normalization. I don’t know how else to say it. It may not get a hundred percent normalized, but normalization. You’ll think about going to- My travel group, there’s only like five of us, six of us, seven of us, we have just scheduled going to Greece in May. Now I hope we get there, but that’s normalization. We didn’t do any of that for two years. That’s all I mean by normalization, just normalization of the consumer. As opposed to I couldn’t spend any money, so I saved it all. All I can do is buy a house. Then I’m going to go out and party like hell in the summer, then, oh my God, Delta comes, and I have to un-normalize, and then we start normalizing. I just think you’re going to see more normalization. The normalization, when you look at these charts 10 years from now, you’re going to see that this was a real year and probably the latter third of last year was a real normalization period.

Montesi: Yeah. And so, we’ve had pent up demand from staying home and we’ve also had the rotation, the dollars that are rotating from travel or from the cinema or from in-person sports or whatever those folks into apparel. Apparel had a huge holiday.

Linneman: You’ve got it. And I think, by the way, you’ll see a normalization of work patterns, not a hundred percent, but there will be a normalization of work patterns. You will just see normalization in travel. You’ll see normalization in family holidays. You saw how much people wanted it at Thanksgiving and Christmas, even with Omicron out there. So, I hope I’m right.

Montesi: What about normalization or trends affecting multifamily?

Linneman: Well, people still need housing. We have still got a huge underproduction of single-family housing, and we still have a bit of an underproduction of multifamily housing. We have not eliminated that. The reason I say single family first, Terry, is if Toyota had a fundamental shortfall, that’d be good for GM. And while they’re not perfect substitutes for everybody, they’re decent substitutes at the margin. The fact that single family has been so massively underproduced for almost 20 years, it provides a floor in a way for multi. It really does because there’s not enough homes, and the homes are really expensive. So, that provides a bit of a floor. The demographics, as you know, are pretty good. Yes, we’re producing more multifamily, but largely what that’s going to do in about two years at the rate we’re doing is undo a good portion of the shortfall in production. So, I feel good. I felt better about rent and occupancy potentially a year ago than I do today because a lot of it happened, a lot of that activity has already happened. But I still feel good. There’s still a lot of people sitting home with mom and dad who I still think will come out, particularly when mom and dad kick them out after they refuse to get a job. So, I feel good and I feel very good about the capital market side. And on the capital market side, let’s go back to what we were saying. I don’t think the long rate rises more than around 100 basis points and the spread will narrow at least 30 basis points as that occurs. So, you’re looking at probably a 70 basis point increase. You’re still okay. And Freddie and Fannie are there, and yes, a lower cap rate would make it tighter. But yeah, I feel good about multifamily still. I felt even better. You remember, I think it was a year ago, I came out in Linneman Letter saying, “It’s the golden era of multifamily investment.” Well, since then, I would say a lot of the things I said would happen happened, maybe a little faster than I thought, but not totally. It is still a good period. You’re still in that golden era. You’re not out of the golden era. It’s not probably as golden as a year ago, but it’s still quite good.

Montesi: Great, thank you. Yeah, one thing we noticed, it was reported that more people left their jobs in November than ever before in a single month. And that obviously is having an impact on workplaces and businesses as is work from home, hybrid, more remote work. What are your thoughts about all those things and how office comes out of this the next couple of years?

Linneman: I think office comes out of it far better than most people think. I don’t think we created a new way. By the way, you and I could have done this conversation strictly by phone for at least the last 30 years. And I’m not sure people are that much better off being able to see me. I don’t know that it’s made their life that much more rich.

Montesi: Oh, it has enriched me today greatly, Peter, thank you.

Linneman: But so, I’m not minimalizing these technologies. And by the way, most of what you and I do, we don’t need encryption. You would agree? I mean, yes, it’s nice that it’s encrypted for a merger and acquisition, but most of what we do, we don’t need the encryption. We did it for years without encryption. So, I think office comes back. It’s going to take a little while. Basically, what’s happened, and I don’t know about you, I’ve done it, most of the employers I talk to say I’m going to get them back, but I don’t want to get them back needlessly early. We’ll just keep treading water another week, another month, another three months if we have to, but we’ll get them back. And so, I think they come back to work. The big quit rate is interesting. The big quit rate, if you think about it, largely speaks to how good things are, not how bad things are. It does mean that usually, if you quit your job today, let’s just suppose you quit your job today, do you think you’d be working tomorrow? Unlikely. You may have already lined up your job when you quit, but not a lot of people quit on a Monday and are at the new job on Tuesday. More typical is I quit on a Monday and then about three weeks to a month, I show up. And that’s if you already locked one in. So, people are quitting because things are really good. It’s good news. People are quitting because it’s really good. A lot of people stayed on the job longer than they would have because if you had a job and you needed the income, would you have quit in December 2020? I don’t think so. But by the way, you were planning, at the start of 2020, you were planning to quit in December, but you got there and said I better hang on to what I’ve got. So, a lot of what you’re seeing was pent up quits. Then you also had the unintended mistakes like you and I talked about, which was I thought I gave them a raise and I gave them a salary cut, and they’re upset about it, and they’re moving on. So, some of it is that. And the other part is really good news. My options have expanded. The economy has come back. My options have expanded, and I quit and it’s going to be three to six weeks until I show up in the employment side. I show up in the unemployment side when I quit. But I don’t show up on the employment side for like six weeks, four to six weeks. So that’s going to be a lag. And I think you’re going to see a spurt out there because some of these people have jobs, but they’re not on payroll yet. So, when I asked on the payroll data the number of employees, they’re not there yet. They show up as a quit, but not as a payroll. If I asked the person did you quit? They say yes. If I ask them are you working? They tell you the truth – not yet, come back in five weeks, three weeks. So, I think actually the big spike in quits you’re going to see happen on the other side in a big spike of hires sort of a month or two later. I don’t think these people are just going to play tiddlywinks the rest of their life.

Montesi: One thing I heard from a head person at LinkedIn, their research showed that one in 67 jobs was remote, fully remote pre COVID. One in seven jobs are now remote. That’s a shift. That’s a big, somewhat seismic shift. And what that looks like a year or two or three from now, none of us know. But obviously people like flexibility or some people really, really like flexibility. But what that looks like long term, none of us know. And what does that do to productivity long term, none of us know.

Linneman: Let’s be honest. You’re right that some of us like flexibility. There’s no doubt about that. But flexibility generally has a cost, generally. How should I say this bluntly? How many of the people who say they don’t want to go back to the office, what they really don’t like is answerability? And there’s no doubt answerability was never spectacular, even when they were in the office. But it’s really not spectacular now. And I sat in an interview a while ago, you remember the show The Office that was a huge comic success. Ricky Gervais did it in England and then he did it in the US. You understand the reason it was so successful was it showed that even at the office, huge swaths of time were unanswerable time where people were just doing crazy nonsense. And everybody looked at it and kind of went, oh yeah, I kind of know that. And that’s when there were bosses there. And in fact, if you think about the show The Office, part of it was that middle level management was roped into the craziness and in many cases, led the craziness at Dunder Mifflin or whatever the company was. And so, the reason it resonated is it was true. Now can you imagine what The Office looks like remote? If you did The Office remote, I can only imagine the insanity that’s going on. I know I’m paying them for it, but I don’t know if I’m getting any productivity out of it. And no one likes to say that out loud, but we know it’s true. Everybody, every employer knows that it is true. And you like to believe it’s less true at your firm. And so, it’s a little like remember Garrison Keillor’s Lake Wobegon? Remote work is like Lake Wobegon where everybody is above normal, but not really. By the way, to your listeners that have never listened to a Garrison Keillor Lake Wobegon monologue, I urge you to go to YouTube, much less read his books on Lake Wobegon. But if you’ve never heard his monologues on Lake Wobegon, do yourself a favor, go to YouTube, Garrison Keillor Lake Wobegon. There’s a ton of them there. They’re priceless.

Montesi: Pretty interesting. Okay so, one thing we haven’t talked about that is always interesting to ponder is the economic cycle and what does a couple of years of COVID do to the economic cycle, and so, where might we be and what might this cycle look like? The COVID interruption to normal economic cycles and what does that mean? And what’s it going to look like going forward, etc.? What are your thoughts?

Linneman: So, if we would have done this same interview in January 2020, my guess is 30% of the time would have been taken up with are we on the brink? When are we going to go down? Are we on the brink? Are you seeing excesses? What are the excesses? With good reason, by the way. I’m not trying to suggest those were bad reasons because we had had basically a 10-year run. And what the shutdown and what the- imagine the extreme. Usually, downturns occur because businesses do excessive behavior. They overexpand, they overleverage, they produce too much. And it’s wonderful why you’re doing it and why you’re borrowing it. It’s when you have to repay it, and gee, they’ve already bought all the cars they need because they bought three last month, they can’t buy three every month. Think of the shutdown – I’m being extreme – imagine you would have shut down a hundred percent of the economy for a year. One of the things you would have done was get rid of the excesses. You’d have truly gotten rid of all the excess. Well, we didn’t shut a hundred percent down. We shut 30, 40% down. We had knock-ons and others. We got rid of a lot of the excesses that would have otherwise happened. So, in retail, for example, most of the retailers – and I should be careful – other than the small restaurant type of places, most of the retailers, the major retailers that went out of business in the last three quarters of 2020 and the first half of 2021, they were going to go out of business anyway.

Montesi: Yeah, we didn’t really need them.

Linneman: Either in 2020, ’21 or ’22.

Montesi: Yeah. Retailers that aren’t really needed that nobody cares about are an example of excess.

Linneman: And so, they’re an example of excess. And by the way, they’re taking sales away from other stronger centers, other stronger retailers by limping along. But if you looked at who went out of business and you’d have gone back two years ago from today, you wouldn’t have been surprised at any of them going out of business. You just wouldn’t have been because they were all weak retailers. The only question was were they going to limp along for a year or four years? And if you had them as a tenant, you were hoping four years, if you had a weak center. And if you were a landlord and had them as a tenant in a strong center, you were hoping tomorrow so you could replace them. And then you throw in the moms and pops into that who weren’t going to go out of business. Now, can I give you a couple of exceptions? Sure, the fitness centers. I don’t think some of the fitness centers that went into bankruptcy or went out of business would have gone under, and the cinemas. So, there are exceptions to what I’m saying. But it wiped out excesses. It wiped out excesses. So, we’ve got like a new clock. And I think we’re sort of really early in the new clock, and the clock’s got years to run yet before we build up. We just don’t have enough courage to do excesses. Go back to what we were talking about supply capacity – our problem isn’t excess capacity in industries. Our problem is sector after sector of shortage of capacity. Well, until we get back to a balance, we’re not going to have excessive for a long while. So, I think we’re in the very early phases of this. And that’s because one good thing the shutdown did and all the knock-ons of COVID is it eliminated lots of excesses. It eliminated a lot of weak players. They already did their damage to the financial system if you will.

Montesi: Thank you for tuning in to today’s episode. Be sure to subscribe to the podcast so you can hear the rest of the conversation. To learn more about Trademark, visit trademarkproperty.com.

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